"Over the next six to nine months, there's the serious likelihood of a collapse in the commodities market," said John Brynjolfsson, managing director at Armored Wolf, a hedge fund in Aliso Viejo, Calif. He noted that commodities have taken a hit with the sharp slowdown in China's economic growth rate. He termed one forecast for 5.8% growth in next year's gross domestic product as the equivalent of a depression for China. "That means the U.S. financial crisis will be magnified by the collapse in broader global demand."
Brynjolfsson recommended avoiding industrial metals and energy-i.e., things based on cyclical economic strength. Peter Schiff, president of Euro Pacific Capital in Darien, Conn., said the world will soon tire of lending money to the U.S. for Americans to squander, and will instead reinvest more in their own economies. That will ignite domestic consumption in big-ticket items that will raise living standards in developing nations. "That's where I think the real lift in commodities prices will come from," Schiff said.
Noted commodities bull Jim Rogers gave a far-ranging and entertaining talk on why China is the future, why long-term U.S. bonds aren't worth a lick, and why commodities are in a long-term secular bull market despite the recent stumbles. These recent setbacks, he believes, are due largely to massive forced selling by hedge funds and other investors.
Rogers said stocks periodically go through long sideways markets, and we're eight years into the current sideways cycle. At the same time, Rogers believes a concurrent commodities bull market cycle began in 1999 and has been fueled by severe supply-and-demand imbalances that should continue for the foreseeable future. He noted there's an inverse relationship between stocks and commodities-higher commodity prices mean higher costs and lower profits for companies, which hurts stocks.
Based on three long, bullish periods for commodities in the 20th century, he said the average commodities bull market lasts about 18 years. "I'm not saying that'll be the case now," he said. "I'm just talking history." Rogers said he's buying mainly shares of Chinese and Taiwanese companies and the Chinese currency, along with agricultural commodities, through his own index fund. "Ag is very cheap on a historical basis," he says.
Jeffrey Saut, chief investment strategist at Raymond James & Associates, noted growing wealth in developing countries boosts demand for animal protein, which means greater demand for grains to feed livestock. He said global food production is expected to rise twofold by 2050. "There'll be bumps in the road," Saut noted, "but I think it's an unstoppable trend."
Saut said he trimmed his commodities positions by 30% to 40% in late 2007 when the sector got too hot, but says he likes water and fertilizer companies. "I'm bullish on Vietnam because it has a lot of water and arable land," he said. Saut also liked ADM's convertible preferreds.
One issue bandied about is whether commodities are a true asset class. But Philippe El-Asmar, a managing director at Barclays Capital, said this argument was less important than what percentage of a portfolio should be allocated to commodities.
Some panelists at the conference pegged an allocation to commodities as high as 15%, but El-Asmar was more measured. "The proper allocation depends on the advisor, but the rough answer is 3% to 5%," he said.
RIAs Speak: Schwab Is Tops
Registered investment advisors are the most powerful asset-gathering force in the advisory industry. At least that's how they're described in a survey from Citigroup that examines the RIA space and what makes it tick. The survey says that the RIA segments at Schwab Institutional, Fidelity and TD Ameritrade garnered more net new assets during the past six quarters than Merrill Lynch, Smith Barney (a Citigroup subsidiary), Morgan Stanley and UBS combined.
The survey was chock-full of factoids about RIAs, but perhaps the juiciest tidbit in the report is this: Schwab was the custodian of choice by a landslide. If this were the Academy Awards, Schwab would walk off with the Oscar for best picture, director, actor, actress, screenplay-and maybe even costumes.
According to Citigroup, surveyed RIAs ranked Schwab first in each of the six categories rated. In the best service category, Schwab took top honors with 77% of the vote. Another 70% of RIAs said it has the best brand, while 68% said it has the best technology. When it comes to the best referral program, the best mutual fund offering and the lowest-cost service, Schwab finished first with 58%, 54% and 50% of the votes, respectively.